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Will Apple Maintain Its Services Growth in 2020?

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Apple (NASDAQ:AAPL) spurred a new wave of optimism after it announced astounding App Store sales during the holiday season. In the period between Christmas and New Years, the App Store saw record gross sales of $1.4 billion. Notably, the App Store garnered a record of $386 million on January 1 alone. The company indicated that 2019 saw 25% of the App Store’s total gross sales of $155 billion since 2008. In the past year, the App Store’s gross sales were nearly $38.7 billion.

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Overall, the company revealed that 2019 was a landmark year for its services segment. Apple’s senior vice president of Internet Software and Services, Eddy Cue, said, “2019 was the biggest year for Services in Apple’s history. We introduced several exciting new experiences for our customers, all while setting the standard for user privacy and security.”

Apple disclosed other service statistics

Apple News now has more than 100 million active users across the US, Canada, the UK, and Australia. Meanwhile, the Apple Card business has also expanded with increased collaborations. Now, buyers can use Apple Card to purchase the iPhone at zero interest over 24 monthly installments. The company also mentioned that Apple PodCast has more than 800,000 shows, while over 50% of the Apple Music listeners have the new time-synced lyrics aspect. However, the company didn’t disclose any subscriber numbers for Apple TV+, Apple News+, or Apple Arcade.

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Analysts optimistic about App Store and wearables

According to MarketWatch, Wedbush analyst Daniel Ives thought that the numbers were “impressive.” He was also upbeat about better-than-expected AirPods shipments in 2019. At the end of the year, the company shipped 67 million AirPods compared to his original estimate of 56 million. Ives said that “underlying strength that [Apple] is having monetizing its golden jewel installed base of 925 million iPhones worldwide heading into the fiscal year 2020 and beyond.”

Apple’s growth story was also impacted by wearables. Encouraged by the response to AirPods, the company launched two versions of AirPods in 2019. In early December, Citigroup’s Jim Suva said, “We believe consensus is under appreciating the Apple Watch and Apple AirPods demand strength and Apple’s wearables segment is likely to surpass $10 billion of quarterly sales this quarter,” as reported by CNBC.

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Why are some analysts bearish about Apple?

However, according to MarketWatch, not every analyst is upbeat about the App Store sales. Jeffrey Kvaal from Instinet highlighted that the growth of App developer earnings slowed to 15% in 2019 from 27% in 2018. Kvaal expected 20% growth in developer earnings.

In his research note, Kvaal said, “Our estimate of 15% App Store growth in 2019 is likely a conservative barometer for FY20 growth, as it reflects a slow year in China gaming as well as only trial subscriptions for Apple TV+.” He also said, “Nevertheless, the growth rates imply little scope for upside to our 18% estimate and may suggest deceleration towards the mid or even low teens in FY21,” according to MarketWatch.

On Wednesday, Apple stock climbed to a record-high level due to strong App store sales. The stock rose 1.6% and closed at $303.19. In after-hours, the stock even rose to $304. Apple stock has doubled over the year amid the stellar performance in the service segment, wearables, and the iPhone 11. In 2019, the stock posted nearly 89% growth.

According to Business Insider, on Sunday, Deutsche Bank cautioned that Apple is “unlikely to come close to repeating last year’s returns.” According to the bank, the company has strong fundamentals. However, there are a few underlying risks in 2020. The risks include iPhone growth, macro risks over the partially-resolved tariff situation, and a high valuation. Deutsche Bank said that “we are unsure whether the fundamental outperformance can outstrip the high investor expectations for the stock in 2020.”

iPhone and Mac crucial for services growth

Ives’ statement highlights that iPhones are important for Apple’s overall business. The iPhone isn’t just a product line, but a gateway to the company’s other offerings. The iPhones’ massive installed base has allowed the company to expand its services.

Along with iPhones, the Mac and iPads also play a crucial role in Apple’s services. Apple’s hardware business is equally critical to its business. The company’s service segment might have gained immense momentum. However, the service segment can’t grow without the installed base. Therefore, the company needs to focus on and boost its iPhone and Mac businesses.

With just a few weeks ahead of Apple’s results for the first quarter of fiscal 2020, it has ignited fresh hope among investors. We’ll have to see if Apple’s results give us enough reasons to maintain this buoyancy.

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